Profit Gobble (NIB,DBC)


Executive Lounge, Wall Street Elite / Monday, June 4th, 2018

Profit Gobble (NIB,DBC)

 

A farmer friend of mine says he wouldn’t be in any other business.  He raises beef cattle, chickens (for eggs) and has a small herd of dairy goats, and he’s convinced that it’s an enterprise that can’t fail, regardless the economic forecast, if things are managed properly.

 

And we’d agree, though we might quibble with his product line.

 

In the end, though, it’s true; there’s no escaping that we all have to eat.  Some are willing to survive on junk, of course, while others are a little more discerning.  But when it comes down to how your last dollar is spent, food is where it’s at.

 

Apparently farmer-boy has a point.

 

Our Four Gs investment strategy long ago recognized the need to put eggs in the investment basket.  Diversify if you want – and better you should! – just be darn sure that you got some genuine eggs in there!

And it’s with precisely that in mind that we turn to the food sector for today’s trade.

 

We start as follows –

 

  1. Commodities are experiencing an upturn. And it’s not just oil that’s rising, friends, though energy gets the bulk of the attention.  Across the board, Bloomberg, Goldman and Deutsche Bank’s commodity indexes are all on the rise.

 

Have a look here –

This is a daily chart of the PowerShares Deutsche Bank Commodities Index Tracking Fund (NYSE:DBC) for the last year.  And it’s clear from the uniform and rising trend channel (in red) that the commodities are now in possession of some healthy momentum.

 

With price holding above all her moving averages and all the MAs themselves unfurled and trending higher, there’s little reason to suspect the move is over.

 

Moreover, a look at the action on the RSI index (in green) shows that despite three separate flirtations with the overbought 80 line in the last seven months, DBC has not only held its gains, but has twice managed to achieve new highs.

 

We don’t expect a great deal of time to elapse before she does so again.

 

Pinpointing the Leaders

 

  1. As mentioned above, it’s the energy sector that’s been grabbing the commodity headlines of late, but a look below shows some of the other leaders in the class.

 

This is a chart portraying YTD gains among the biggest financial assets traded globally.

With the first five places in the chart going to commodities, it’s hard to argue against exposure to this surging asset class.

 

And remember, too, that the above chart is limited to what’s referred to as the “major” financial assets.  There are others, besides, and with this week’s trade we’ll highlight just how far afield we’re prepared to roam in order to snag a bargain.

 

The Global Trading Milieu

 

Before we discuss our trade, one more word on commodities investing as a whole.

 

  1. It’s widely understood that when commodities are on the rise amid a trade environment in which a) tariff implementation, b) talk of ‘trade wars’ and c) the renegotiation of trade deals are making headlines, then it’s likely you have the makings of an upcoming speculative frenzy that could carry the commodities in general, and food prices in particular, exceptionally higher.

 

And while that may not be beneficial for mom and pop doing the shopping for little Beatrice and Junior, if prices are on the rise, doesn’t it behoove us to own part of those gains via our investment portfolio?

There you go…

 

It apparently behooves the big banker/brokerages, too, who’ve seen particularly large gains from their commodities books this year.  Goldman Sachs’ trading desk, for instance, has made more in the first few months of 2018 than they did all of last year.  According to the latest filings, the biggest hedge funds are also piling in.

 

So where exactly to put our funds?

 

M&M’s

 

We like that West African delicacy that goes by the name of cocoa – used in chocolate, of course, but minus all the sugar, it actually possesses manifold health benefits.

 

But that’s for another day.

 

Let’s start with a look at cocoa’s monthly chart and drill down to the nitty gritty as we go.

 

This is five years’ worth of the iPath Dow Jones-UBS Cocoa Total Return Sub-Index ETN (NYSE:NIB).

Technically, it breaks down as follows –

 

First, the scooping action currently taking place on the 27/28 month moving average (in blue) is promising.  The pattern generally indicates a bottoming process is underway and a move higher is in the works.  The fact that the scoop transpired on the back of a massive turnover in volume (in black) only adds urgency to the thesis – this is very likely accumulation on the part of strong hands while weaker mortals unload.

 

Finally, RSI and MACD have shown positive divergence against price since early 2017 (in green).

 

All told, a very constructive picture.

 

Now look at the weekly.

NIB’s weekly chart shows the positive divergence (in green) even more clearly than the monthly.  Volume figures are also conspicuous (black box).

 

But it’s with the weekly moving averages that our focus lies, because here it becomes clear that the run-up from last December has hit a wall.

 

Resistance at the longer term weekly moving averages in the 34/35 range acted as a steel curtain, sending cocoa immediately lower to regroup (red line).  But with NIB now hugging support, and the short term MA on the rise from below (in blue), we feel the weekly chart is also pointing to a potentially lucrative entry point at current levels.

 

Look now at the daily –

The revved up action into early March shows clearly that NIB got ahead of itself.  An overbought RSI read (in red) along with several gaps higher (in blue) means we had to see a cooling off period.  And that’s precisely what’s happened over the last month (green).

 

Yet the technical picture is still promising here, too.

 

With the salient moving averages about to roll higher, and strong support emerging in the 27/28 range (in black), we see an all-systems cocoa-go before us, and we’re encouraging you to play it against the broad commodity sector in a long short trade that looks like this –

- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]

Wall Street Elite recommends you consider buying 100 shares of NIB for $29.61 and selling 100 shares of DBC for $17.91.  Total debit on the trade $11.70.

- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]

With kind regards,

 

Hugh L. O’Haynew

Leave a Reply

Your email address will not be published. Required fields are marked *